The execution of the US$2bn bank financing for Reliance Petroleum Ltd (RPL) marked yet another milestone for Reliance Industries Ltd (RIL) in setting up one of the largest export-oriented refinery complexes in the world. By Rodolphe Olard, Mike Bonnici and Ramnath Krishnan, HSBC.
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RIL, the flagship company of RIL Group, is India's largest private sector company, with a market capitalisation in excess of US$36bn. RIL enjoys a pre-eminent position in the Indian economy with revenues equivalent to about 2.8% of the country's GDP. RIL contributes 8.2% of India's total exports, 8% of the Government of India's indirect tax revenues and accounts for about an 11.5% weighting in the Bombay Stock Exchange Sensex.
The company's investment grade ratings of Baa2 (Moody's) and BBB (S&P) are one and two notches respectively above India's sovereign rating. RIL's activities span the entire hydrocarbon value chain, including exploration and production of oil and gas, refining and petrochemical businesses. Refining contributes about 57% of the company's Ebitda.
RIL has proven expertise in building and operating a large refinery and petrochemical complex. It currently owns and operates the third largest refinery in the world, located in Jamnagar in the state of Gujarat in Western India. The existing refinery was constructed ahead of schedule, in a record time of 36 months and within budget and was completed in 2000. It has operated at near 100% utilisation ever since. With a Nelson Complexity Index of 11.3, an indicator of level of complexity, the refinery has achieved gross refining margins (GRMs) that are consistently higher by US$2 to US$3 per barrel than the benchmark Singapore Complex Margin.
Using its experience gained in constructing and operating the existing refinery, RIL is now setting up a new export-oriented refinery that will be located adjacent to the existing refinery in a Special Economic Zone. To this end, RIL has formed a new company, Reliance Petroleum Ltd (RPL).
The RPL refinery will be the sixth largest globally, with a capacity to process 580,000 barrels per day of crude oil. It will also have a 900,000 tonnes per annum polypropylene plant. RPL will produce light and middle distillates (mainly transportation fuels), using proven technology licensed from reputed licensors Universal Oil Products (UOP), ExxonMobil Research and Engineering (EMRE), Foster Wheeler and Dow.
The RPL refinery will have significant secondary processing facilities designed to maximise the quantity of value added products such as propylene, jet fuel and diesel. The Nelson Complexity Index of RPL will be about 14. The key features of the RPL refinery are its ability to:
- Process heavy/sour crude (such as an average of 24 API and 2.5% sulphur) to take advantage of the light-heavy price differentials.
- Convert low value streams to higher value transportation fuel.
- Produce clean fuel, which will enable reduction of sulphur content in diesel and gasoline to 10 parts per million. This capability gives it a distinct advantage over a significant number of its existing competitors.
RPL will primarily target European markets for sales of jet fuel, kerosene and diesel, the US and Asian markets for sales of gasoline and the Asian market for sales of polypropylene.
The project, estimated to cost US$6bn, is being funded through equity of US$2.5bn and the balance in debt. To raise the equity, RPL concluded an initial public offering (IPO) of its equity shares in April 2006. The IPO generated a record level of demand across all investor categories and the overall book was oversubscribed by more than 50 times.
Pre-IPO, Chevron Corporation, the fifth largest integrated oil company in the world, acquired a 5% stake in RPL for US$300m and has a right to acquire an additional 24% equity stake. With the completion of the successful IPO, RPL has raised equity of US$3bn. Post-IPO, RPL is 75% owned by RIL, 20% by institutional investors and the Indian public and 5% by Chevron.
The RPL project will be implemented on a fast-track basis using the 'Intelligent Repeat Design' concept. RPL has appointed Bechtel Corporation, which was responsible for constructing the existing refinery, as the lead contractor for the implementation of the project. Bechtel has been given single point responsibility for project implementation and is providing detailed engineering, project management, site support and construction supervisory services, as well as being responsible for the offshore supply of equipment and bulk materials for the project.
The experience gained in constructing the existing refinery will enable RIL to complete the RPL project far quicker than would otherwise be the case. The configuration and design of the RPL refinery will be largely similar to that of the existing refinery and RPL will be using the same technology licensors. This will help it to reduce the project implementation period.
Nexant, which is the lenders' technical adviser, estimates that to construct a similar plant starting from scratch would take 48–60 months as projects of this complexity undertake a front-end engineering design (FEED) prior to tendering an EPC contract and moving to implementation. However, RPL has not needed to develop a FEED package given the repeat design. Consequently, it is expected that the RPL project will be completed in 36 months.
The construction of the project started in December 2005 and RPL aims to begin commercial production by December 2008. This will give it a significant early mover advantage as most of the new refining capacity is expected to come on stream in 2010–11. RPL has already achieved significant progress on various fronts. Construction work has begun and all critical long-lead equipment has been ordered, thereby limiting the risks of cost overruns. The project is already about one-third complete and is slightly ahead of schedule.
To raise the commercial debt, RPL appointed 14 banks comprising HSBC, ABN AMRO, Bank of America, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Calyon, Citigroup, DBS, DZ Bank, ICICI, Mizuho, Standard Chartered, SBI and SMBC as the core mandated lead arrangers. It appointed HSBC as the documentation bank, Citibank as the technical bank, ABN-AMRO as the environmental bank and ICICI as the insurance bank. Milbank Tweed Hadley & McCloy was appointed as lenders' legal counsel and Taylor Risk Consulting as lenders' insurance advisers.
One of the key concerns of lenders was the construction philosophy being pursued by RPL and the fact that the key infrastructure required for the project sits outside the confines of the project.
The engineering, procurement and construction (EPC) contracts entered into by RPL are not the conventional lump-sum, turnkey, date-certain contracts normally seen in project finance transactions. However, in RPL's view, the contracting strategy embodied in the EPC contracts is the lowest cost solution in the current contractor-friendly construction market. RPL will source various facilities/services from group companies, which will provide significant synergies.
The lenders' concerns in relation to completion risk were addressed through completion support provided by RIL under which RIL undertook to provide/arrange the shortfall in the balance of debt required for the project and to provide/arrange the funding for any time or cost overrun and any other funding requirement for completion of the project. The other key concern that the banks needed to analyse carefully was the project economics and in particular whether refining margins over the next 10 years will be sufficient to enable RPL to repay the debt. The banks drew comfort from the following:
1 – RIL's experience with the existing refinery. The existing refinery's gross refining margins have been consistently higher than the benchmark Singapore Complex Margin by US$2–$3/barrel.
2 – RPL's capital costs are significantly lower than the estimated industry average, thereby giving it a sustainable competitive advantage.
3 – The RPL refinery will be able to process heavier/sourer crude with an average API of 24. Only 5% of global refineries can process crude with an API of less than 26.
4 – RPL's ability to meet superior product specifications for the European and US markets.
5 – RPL will have flexibility in operations to change the product slate to respond to market forces.
6 – Linkages with the existing refinery: RPL will source substantial feedstock from the existing refinery and will return some of the product streams to the existing refinery, which will further improve RPL's gross refining margins.
RPL's business plan has all the desired ingredients: economies of scale, superior configuration, and product pattern optimisation. RPL will strongly benefit from RIL's extensive experience in the refining business and a proven expertise in building and operating large projects. RPL has entered into long-term contracts with RIL for services in respect of crude oil procurement, product marketing and technical consultancy services for operations and maintenance.
The involvement of Chevron is another significant positive. Chevron, RIL and RPL have entered into a non-binding memorandum of understanding under which Chevron intends to enter into a long-term contract with RPL for supply of crude oil and off-take of RPL's products.
The kick-off meeting among RPL, HSBC as the documentation bank and Milbank took place in Mumbai at the end of March 2006, at which time documentation issues were discussed. The finance documents were prepared and the first round of negotiations took place in Mumbai in May 2006.
Following intensive negotiations between HSBC, Milbank and RPL the finance documents were redrafted and another round of intensive negotiations took place in Mumbai in July 2006. The finance documents were agreed among HSBC, Milbank and RPL on July 28 2006, following which they were released to the remaining MLAs for approval.
The syndication was launched on August 11 2006. Nine MLAs (HSBC, ABN-AMRO, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Calyon, Citigroup, ICICI, Standard Chartered and SBI) were given the responsibility of bookrunning. Due to the tight timeline, both sub-underwriting and general syndication were launched simultaneously. In order to attract as many banks as possible, the following tickets were proposed:
Title Underwriting amount Anticipated final hold Underwriting fee Participation fee
Mandated lead arranger US$100m US$75m 0.15% 0.70%
Senior lead arranger US$75m US$50m 0.1% 0.65%
Take and hold
Title Participation amount Participation fee
Lead arranger US$50m and above 0.65%
Arranger US$30m–$49m 0.50%
Lead manager US$15m–$29m 0.35%
The pre-completion margin for Tranche A (tenor 7.5 years) is 80bp pa and for Tranche B (tenor 10 years) 85bp. Post-completion, a step-up in margin is included. Tranche A has a margin of 140bp and Tranche B of 165bp. This might encourage RPL to refinance post-completion.
Roadshows were held in Mumbai, Singapore, Hong Kong, Taipei, Dubai and Bahrain. RIL and RPL management provided maximum support to the bookrunners during the syndication stage, including one-on-one meetings with prospective sub-underwriters. Undoubtedly, Reliance's considerable efforts in this regard helped maximise the number of banks that came into the financing, thereby significantly expanding the company's universe of banks.
The transaction attracted the largest number of banks in a syndicate for an Asian syndicated loan transaction in the past five years and was substantially oversubscribed with an order book of about US$3.4bn. Fifty-two banks, from Asia, Europe and the Middle-East, came forward to participate in the RPL financing. Due to such huge demand from the banks, the transaction was increased from US$1.5bn to US$2bn and the MLAs were severely scaled back. RPL executed two facility agreements for US$1.5bn and US$500m with similar terms and conditions.
RPL set a very tight timeline for the closing of the financing, but the core MLAs managed to meet this demanding schedule. In order to save time, RPL adopted a sequential approach to raising the financing required for the project. It first raised equity by launching an IPO in April 2006 and has now raised US$2bn through commercial debt.
It will now concentrate on its discussions with Export Credit Agencies (ECAs), from which it expects to raise a further US$1.5bn. RPL is in intensive negotiations with five ECAs. Given that most of the groundwork in relation to due diligence, finance documents and security arrangements has already been done, RPL expects to close the ECA tranche by the end of this year.
This is a very challenging project. The utilities are outside the confines of the project and the finance structure does not include a number of provisions typically found in a project financing (eg, cash waterfall, a debt service reserve account, controls on project budget and financial tests for distributions).
RPL sought maximum flexibility in managing its affairs. The banks were prepared to look at a quasi-corporate structure, which principally relies on the strength, commitment, capacity and obligations of RIL and its affiliates. RIL takes the risk of delivering a project that must pass a stringent lenders' completion test and until such test is passed RIL must, in the absence of available funding, continue to pay all project costs as they fall due.